Their decision to buy through a brand’s social media channel is influenced by factors such as:
- User-generated content including images from customers who have previously bought the product
- Recommendations of other products they’d like
- Ability to buy directly through social media
There’s never been a more direct, profitable way to sell through digital channels.
And with Facebook and Instagram ads providing an easy way to increase your reach, it’s no surprise that Facebook’s ad revenue is at an all-time high.
Add influencer marketing and ever-growing shopping features such as Instagram Checkout, and social media looks like the way to sell to your ideal customers.
Despite the undeniable impact of social media on ecommerce, 46% of marketing agencies say selling clients on the value of social media marketing was still a challenge in 2018.
The likely reason?
The challenge of proving the return-on-investment (ROI) of social media.
In this guide, we’re diving into social media ROI, what it means for your ecommerce store, and the true value of customers you win on social media.
What is Social Media ROI
Social media ROI sounds self-explanatory at the surface level. It’s a metric that represents the value your social media investment had generated.
Easy, right? In many cases, we talk about social media ROI as the revenue we’ve generated based on the budget we’ve spent on a Facebook or Instagram campaign.
The formula goes as follows:
Social media ROI % = (Revenue – Investment) / Investment X 100
As an example, you might launch a Facebook ad campaign and invest a $700 budget. This campaign generated sales that brought you $1,200 in revenue.
When you deduct the $700 investment from your $1,200 revenue, you see a $500 profit. Divided by investment and multiplied by 100, your social media ROI in this case would be 71.4%.
Of course, when you look deeper into the parameters of this formula, it’s clear how calculating social media ROI isn’t always quite as straightforward.
First, the return you’re looking for won’t always be tied to a straightforward (and obvious) numerical value such as revenue. Your goals and business objectives will vary, and so will the way you’re looking at return.
For example, you might be looking to:
- Increase your brand awareness
- Lift your customer satisfaction
- Reduce the product return rate
In other words, social media can generate value for your online store in many ways.
Secondly, the investment doesn’t always look like an easy to track metric such as ad budget. Your social media investment also includes:
- Tools and technology
- Equipment you use to create content
- Cost of labor
- Training and upskilling
- Consultants or agencies
While many of these costs would be part of your investments even if you weren’t focusing on social media, keep these in mind when you’re keeping track of your ongoing marketing spend.
Why Social Media ROI is Important
Social media can easily be seen as a waste of resources.
Especially because most social media platforms don’t make it easy to purchase directly from their interface, ecommerce businesses are even more likely to fall into that type of thinking.
With a solid social media ROI plan in place, you can actually point to activities and campaigns that have moved your online store in the right direction.
In fact, social media ROI is beneficial to your ecommerce business because you can:
- Focus your time and budget on activities that bring you the highest, most long-term returns
- Ditch activities that have shown to reduce your effectiveness or your customer’s satisfaction
- Improve your customer support conversations on social media
- Better understand what matters to your customers, which messages entice them to buy, and which have an opposite effect
Without measuring ROI, everything you do on any of the channels, whether organic or paid, has an equal chance of being a waste of your resources.
How Social Media ROI Is Usually Measured
The answer to this question lies in the equation we outlined earlier.
Social media managers often go through a profit versus investment scenario through a single ad campaign. They are only looking to see profit on that campaign and that investment.
Often they’ll favor the last click attribution method – giving all credit to the click closest to the sale.
Which, as you can see through the below, throws up tracking issues.
In the above, the real driver of the conversion, the first click, isn’t getting the credit it deserves.
It makes accurately tracking the ROI of the campaign impossible.
The most severe issue is how that’s where the tracking often begins and ends.
There’s no tracking past that point so you don’t know where your best, repeat buyers were first attracted to your brand.
This is a problem because it leads to incorrect optimizations.
Let’s say you’re tracking only by last click attribution. You see that Campaign A generates a 1.5X ROI. But Campaign B generates 1.9X.
Smart marketer should put more money into Campaign B, right?
But, if you track beyond that you see that customers from Campaign B rarely make a second purchase while those from Campaign A buy from you 2+ times generating an overall ROI of 2.1X.
Campaign A was, actually, the better option to put more money in.
And when it comes to organic social media… Well, that side of social media ROI is often entirely dismissed. Revenue isn’t measured because tracking what a person did after clicking on an organic link on Twitter or Instagram isn’t as easy compared to social media ads.
It is, in fact, one of the most challenging aspects for many marketers.
There are no pixels or dedicated reports that help you track the exact organic activities that resulted in a purchase (this is why Jumper exists!). As many as 55% of companies have no cross-channel strategy in place.
The Problem With Measuring a Single Campaign
The issue with such a narrow approach to measuring social media ROI lies in a couple of age-old statistics about customer acquisition versus customer retention:
- Acquiring a new customer is 5 to 25 times more expensive than retaining an existing one
- Increasing customer retention rates by 5% increases profits by 25% to 95%
In other words, loyalty is among the most valuable returns on your investment.
A loyal customer won’t only keep returning and spending more (and more often) in each transaction. They’ll also act as your brand ambassador and recommend your products to their friends and family.
Strategies like Facebook ads are extremely attractive because they provide instant gratification. Especially for new ecommerce business owners, this approach can be the portal between “no one knows about us” and “we got our first [number] sales”.
Knowing you can replicate a certain approach to targeting, ad copy, and creative, and reap the same rewards is particularly tempting for online stores who want to keep selling their products successfully.
The problem of this approach? If paid advertising is all you can rely on to drive any sales, your store will take a nosedive the moment you stop investing into ads.
The benefit of relying on existing, loyal customers to spread the word about you through word of mouth won’t be there.
The true social media return on investment would be short-sighted. Here are just some reasons for this:
- Your profit would still only include the ad budget investment, but not the cost of running your business, manufacturing your products etc.
- If social media platforms changed their rules for advertising, it could become more expensive to keep advertising
- Other ROI elements such as brand awareness or customer satisfaction will be neglected
The better approach? Aim your focus on customer acquisition cost (CAC) and the customer lifetime value (LTV).
CAC + LTV = Long-Term Win
If you’re looking to create a long-term, sustainable strategy for your ecommerce business, customer acquisition cost and customer lifetime value are two metrics that will help you get there.
Customer Acquisition Cost
Customer acquisition cost (CAC), just like its name says, is the total cost you incur to acquire a new customer.
This is different than the often mentioned cost per acquisition (CPA), which is the amount you pay to convert a customer—i.e. make a sale—but it relates to new and returning customers alike.
The formula to calculate your CAC is:
Customer acquisition cost = Marketing campaign costs / Total customers acquired
The math is clear. If the $700 budget we mentioned earlier brought you 10 new customers, your CAC is $70.
Customer Lifetime Value
Customer lifetime value (LTV) is the projected amount of revenue a customer will generate over their lifetime at your online store.
It’s a long-term way of looking at your relationship with each newly acquired customer.
Are they only bringing value (i.e. revenue and profit) to you once? How much will they spend over the coming months or years?
Think about this:
- If you sell high-value electronic items such as TVs, your LTV might be $2,000 over a period of 15 years
- If you’re an online fashion store, your LTV might also be $2,000, but over a period of 3 years
- If you sell small home improvement tools, your LTV might be $500 over several decades
In other words, the number of customers you have and the cost you incur to acquire them are the most valuable metrics when compared to your customer’s lifetime value.
You can calculate your customer LTV with this formula:
Customer Lifetime Value = Average Customer Spend Per Purchase X Average Purchases Per Year X Years In A Lifetime Cycle
When CAC and LTV are in sync
Let’s go back to our earlier calculations.
If winning each new customer costs you $70, the typical social media ROI approach needs every customer to spend more than $70 in order to call the campaign ROI-positive.
In this example, we said we made back $1,200, which means that each new customer spent $120 and we’ve made our initial investment back.
But what if it didn’t go that way? What if they had spent just $40? Is this where we call the social media campaign a failure?
To answer this question, we must look into how this cost of acquiring that customer relates to the LTV.
As an obvious rule of thumb, LTV is always supposed to be higher than CAC. If that’s not your case, you’re burning through your money and aren’t earning it back.
Here’s how the LTV:CAC relationship is further broken down:
- 1:1 is losing you money from every acquisition (because people often don’t account for labor costs and expenditures other than the ad spend)
- 3:1 is the ideal level and a reflection of a solid, sustainable business model
- 4:1 is great, but you’re likely underinvesting and could be growing faster
When you look at your campaigns, both paid and organic, through this lens the places to invest your marketing budget can become a lot clearer.
Think about scenarios where you might spend more money to acquire a customer than they initially spend, but you know they will spend more money with you in the future.
Seems impossible? Think about these examples:
- Black Friday promotions: heavily discounted fashion items that result in an initial loss, but the customer keeps spending money with the brand 4-5 times per year for another 5 years
- Subscription boxes: first box for free (i.e. no new revenue), but the customer pays for a monthly subscription for another 18 months
- High ad cost: paying more in ad budget than the initial order value due to the mechanics of the ad platform, but knowing the customer will return for second, third, fourth purchase because they’ll keep upgrading their products
In other words, the focus on a single campaign is short-sighted. The focus on overall profitability and long-term value of a customer is the key to ecommerce success.
Where To Implement The CAC + LTV Approach
Now that you can see your social media ROI through a new lens of CAC and LTV, where can you start putting it into action? Here are a few ideas.
Paid Facebook and Instagram advertising. Instead of looking at just acquiring a customer cheaply and calling it a day, look at how much they might spend over their time as your customer.
Use this to drive your approach to ad copy and creative for your acquisition campaigns, but also to run retargeting ads and ads that encourage reordering and replenishment of products that were initially bought.
Organic social media activity. This has always been a tricky territory because brands find it difficult to track the impact of organic social posts on actual purchases.
This is where Jumper comes in. You can use it to sell from organic Facebook posts, Instagram and Twitter conversations, YouTube videos (such as reviews), and more.
The best part of using this approach is the fact it doesn’t add extra work to your plate because it runs on automated checkout conversations.
By accounting for the cost you incur to create social media posts (e.g. your social media or community management teams), graphics and videos (e.g. freelance designers or video editors) and tools to publish and monitor your accounts (e.g. Hootsuite or Buffer), you can measure your social media ROI and compare it to LTV. (if you want a good guide on how to track your videos in Google Analytics, read this).
Influencer marketing. Because Jumper enables you to partner up with influencers and run automated checkout sequences through them, you can more easily measure what happens the results.
Each of your influencers will have their own unique link for each product they’re promoting. Once you gather data on your influencer cost and sales generated by each, you’ll know which ones result in the best LTV:CAC ratio and where to keep investing your budget.
You’re Ready For Positive Social Media ROI
The days you’ve measured your social media return on investment based on a single campaign are over.
Armed with a few formulas and a Jumper account, you can start looking at the value of each relationship you have with your customers and adjust your time, effort, and budget to channels and strategies accordingly.
Make sure to grab your free Jumper account to get started. Happy selling!